Valero an attractive acquisition prospect

High earnings, low-cost stocks luring buyers.

Published 8:55 pm, Friday, October 28, 2011

After surging 20 percent on takeover speculation, Valero Energy Corp., the most profitable U.S. oil refiner, still is cheaper than 99 percent of corporate America, making it an attractive target for India's Reliance Industries Ltd., Russia's OAO Lukoil or buyout firms, industry observers said.

Shares of Valero closed Friday up 1.8 percent at $26.70, the highest level since July. The stock has surged for three days after the U.K.'s Daily Mail reported that Reliance Industries was poised to make a bid for $48 a share. The offer would value Valero at $27.5 billion, about 80 percent higher than Friday's market capitalization of $15.28 billion, data compiled by Bloomberg show.

“If you want to make a big splash in refining in the U.S., Valero would be the biggest prize out there,” said Brian Youngberg, an analyst at Edward Jones in St. Louis. “The company has been very well-managed through the ups and downs and is well-positioned for the future. They make sense as a takeover candidate.”

Bill Day, a spokesman at San Antonio-based Valero, declined to comment on takeover speculation.

Valero would make sense for Reliance Industries, the $58 billion oil refiner controlled by billionaire Mukesh Ambani, India's richest man, said Neil Earnest, practice leader for mergers and acquisitions at Muse Stancil, a Dallas-based consulting firm that specializes in the energy industry.

Reliance Industries, which will have more than $16 billion in cash by year's end, has sought to boost its refining capacity and energy presence outside India. The Mumbai-based company has purchased stakes in shale gas projects in the U.S. and made bids for LyondellBasell Industries NV and Value Creation Inc., a Canadian oil sands company; both failed.

Valero owns Gulf of Mexico refineries that Reliance Industries could use to export gasoline or diesel back to India or the rest of the world, said Harold York, vice president of downstream consulting for Wood Mackenzie in Houston.

“The U.S. is an attractive market for those foreign companies as they try to diversify away from their own countries,” Edward Jones' Youngberg said. “Any foothold they can get in the U.S. makes sense given the low political risk and the opportunities here with shale development.”

Manoj Warrier, a spokesman at Reliance Industries, and representatives for Lukoil and Kuwait Petroleum didn't immediately respond to telephone calls or emails outside normal business hours.

While the stock rally sparked by the Daily Mail's report has added $2.5 billion to Valero, its shares still are among the least expensive in the S&P 500, the benchmark gauge of American common equity.

It's also a good value when looking at earnings per barrel.

Valero posted earnings before interest and taxes of $1.88 billion last year, or $3.30 for each barrel of oil it processed.

That was the highest among eight independent U.S. refiners, data compiled by Bloomberg show. Tesoro Corp. of San Antonio earned $1.50 per barrel, while Philadelphia-based Sunoco Inc. had $1.10 in pretax profit per barrel, according to the data.